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MARKET
INDICATORS
Market Indicators
All
of the technical analysis tools discussed up
to this point were calculated using a security's
price (e.g., high, low, close, volume, etc).
There is another group of technical analysis
tools designed to help you gauge changes in
all securities within a specific market. These
indicators are usually referred to as "market
indicators," because they gauge an entire
market, not just an individual security. Market
indicators typically analyze the stock market,
although they can be used for other markets
(e.g., futures).
While
the data fields available for an individual
security are limited to its open, high, low,
close, volume (see page), and sparse financial
reports, there are numerous data items available
for the overall stock market. For example, the
number of stocks that made new highs for the
day, the number of stocks that increased in
price, the volume associated with the stocks
that increased in price, etc. Market indicators
cannot be calculated for an individual security
because the required data is not available.
Market
indicators add significant depth to technical
analysis, because they contain much more information
than price and volume. A typical approach is
to use market indicators to determine where
the overall market is headed and then use price/volume
indicators to determine when to buy or sell
an individual security. The analogy being "all
boats rise in a rising tide," it is therefore
much less risky to own stocks when the stock
market is rising.
Categories
of market indicators
Market
indicators typically fall into three categories:
monetary, sentiment, and momentum.
Monetary
indicators concentrate on economic data such
as interest rates. They help you determine the
economic environment in which businesses operate.
These external forces directly affect a business'
profitability and share price.
Examples
of monetary indicators are interest rates, the
money supply, consumer and corporate debt, and
inflation. Due to the vast quantity of monetary
indicators, I only discuss a few of the basic
monetary indicators in this book.
Sentiment
indicators focus on investor expectations--often
before those expectations are discernible in
prices. With an individual security, the price
is often the only measure of investor sentiment
available. However, for a large market such
as the New York Stock Exchange, many more sentiment
indicators are available. These include the
number of odd lot sales (i.e., what are the
smallest investors doing?), the put/call ratio
(i.e., how many people are buying puts versus
calls?), the premium on stock index futures,
the ratio of bullish versus bearish investment
advisors, etc.
"Contrarian"
investors use sentiment indicators to determine
what the majority of investors expect prices
to do; they then do the opposite. The rational
being, if everybody agrees that prices will
rise, then there probably aren't enough investors
left to push prices much higher. This concept
is well proven--almost everyone is bullish at
market tops (when they should be selling) and
bearish at market bottoms (when they should
be buying).
The
third category of market indicators, momentum,
show what prices are actually doing, but do
so by looking deeper than price. Examples of
momentum indicators include all of the price/volume
indicators applied to the various market indices
(e.g., the MACD of the Dow Industrials), the
number of stocks that made new highs versus
the number of stocks making new lows, the relationship
between the number of stocks that advanced in
price versus the number that declined, the comparison
of the volume associated with increased price
with the volume associated with decreased price,
etc.
Given
the above three groups of market indicators,
we have insight into:
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The
external monetary conditions affecting security
prices. This tells us what security prices
should do.
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The
sentiment of various sectors of the investment
community. This tells us what investors
expect prices to do.
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The
current momentum of the market. This tells
us what prices are actually doing.
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